So, what elements can be a moat of a company? In The Charles Munger Principle, author Tran Griffin collected Munger's comments on many occasions, and then summed up five basic elements that Munger thought would help to build the moat of the company.
The first factor is the economies of scale on the supply side. If the average cost of a company decreases as it produces more products or provides more services, then the company has economies of scale in supply. For example, Wal-Mart, the more products it sells, the lower the cost. For example, in some large manufacturing enterprises, the more products are produced, the lower the cost.
Munger once gave an example to illustrate the scale advantage. When TV commercials first appeared, they were very powerful because they could enter the living room of every household. However, at that time, only companies like Procter & Gamble had enough strength to advertise on TV, because only they could afford the expensive expenses. Those small enterprises can't advertise in this way and let their products be known by more people. "Therefore, when TV appeared, the brand companies that had grown and developed also got on this ride."
The second factor is the economies of scale on the demand side. The demand-side economies of scale are also called network effects. This means that the more people use a product or service, the more valuable it is. The most typical examples are fax machines and telephones, as well as social networking applications such as Facebook, Weibo and WeChat.
American Express, a credit card company invested by Munger and Buffett, is also a company with network effect. The more merchants accept American Express cards, the more valuable American Express services will be, and the more people will use American Express.
The third element that can constitute a moat is brand. For example, companies like Disney, Coca-Cola, BMW and Nike have powerful brand moats.
Buffett said: "will you try to create a brand that competes with Disney?" The brand Coca-Cola is reminiscent of different people who drink Coca-Cola all over the world. This is what you want a company to have. This is a moat. "
Munger and Buffett invested in Coca-Cola. Similarly, Munger and Buffett also invested in Xishi Candy Company, which has a strong brand moat. Not long ago, Buffett quoted the example of Xi Shi Candy in response to Tesla CEO Elon Musk's remarks about the unimportant moat. On the west coast of the United States, Xi Shi candy is associated with happiness and pleasant experiences, so people will buy this candy, even if it is expensive.
Munger and Buffett also have a criterion to judge how powerful the brand moat is, that is, whether competitors can copy or weaken the moat by spending a lot of money. Buffett once said at the 20 12 shareholders' meeting: "Even if you give me 10 billion dollars, 20 billion dollars or even 30 billion dollars, I can't do it."
Brand moat is hard to come by, but once it is owned, it is of great value.
The fourth element that can form a moat of a company is supervision. For example, Moody's in bond rating agencies has a moat of supervision in the bond rating industry. Because regulators will require bond issuing companies to get the opinions of a few rating companies, such as Moody's and Standard & Poor's. Of course, the danger of using regulation as a moat is that regulatory policies may change. Once changed, these companies will lose the moat and become vulnerable.
The fifth element is patents and intellectual property rights. A company with a large number of patents in the industry also has its own moat. Because other companies in the industry must either pay the bill or make a detour. For example, Munger and Buffett bought Lubrizol, an American lubricant additive company. Lubrizol has more than 65,438+0,600 patents in the lubricant additive industry, which, in Buffett's words, gives the company a lasting competitive advantage. Another example is Qualcomm, which has a large number of patents in the communication industry.
These are the five elements that Charles Munger thinks can constitute the moat of the company: supply-side scale economy, network effect, brand, supervision and patent. I hope it can inspire you.